Thursday, December 4, 2014

Fred Thompson: You Can Pay Now Or Later And Now Is (A Lot) Better

Highway trust funds all over the country are running on
empty. That is true at every level of government: federal, state, and local.

Highway maintenance really isn’t optional. Street and
highway deterioration is inexorable: highway wear and tear is a simple function
of the number, speed, and axle weights of the vehicles using the road and the
passage of time, but damage accumulates at a compound rate. Statewide, given
current discount rates, every dollar of highway-maintenance spending deferred
has an average present value of nearly three dollars in future outlays, ranging
from about $1.50 at the margin in Multnomah County to $11 in Clackamas County
next door.

Recognition of this fact is one of the reasons that
transport funding was placed in trust funds. Earlier generations feared that,
if gas-tax dollars were not carefully walled off, myopic officials would raid
highway maintenance funds to sustain other, trendier endeavors. They were
right, of course. What they failed to take into consideration was the failure
of elected officials to keep gas-tax rates abreast of inflation, let alone the dramatic
improvements in vehicle miles per gallon of gas that have occurred of late.
State per-gallon tax rates have been static for 20 years and mileage per gallon
is up nearly 30 percent.

Tim Nisbett, in a guest
column in the November 21, 2014, Oregonian,
opined that “our transportation funding system is ready for a tax fairness
overhaul.” Nisbett cited with approval a
recent editorial from the Grants Pass Daily Courier calling for a “shift to income
taxes to augment or replace the state's existing gas tax system.”

Nisbett’s argument rests on a series of premises. The first
is that the ‘user pays’ mechanism, which matches tax burdens to the benefits citizens
get from public services, cannot keep up with our transportation needs. Second,
transportation taxes comprise a sizable portion of the average working family's
contribution to state and local services. Third, these taxes are inherently
regressive and that “the roadways of the future will require greater support
from those best able to pay for them.” Finally, user fees exact an especially
unfair toll on rural Oregonians, who tend to use the roads much more than the
rest of us.

I think I am on Tim Nisbett’s side on this issue, but I don’t
buy his argument, at least not entirely. Only one of Nisbett’s claims is
unambiguously correct: that gas taxes are regressive. While it is true that gas
tax revenues haven’t kept up with transportation needs, doubling state gas tax
rates would largely fix that problem. The reason gas-tax revenues are
inadequate is that they have fallen way behind the nominal growth in the
state’s economy, which is entirely due to the legislature’s unwillingness to
increase tax rates, along with DMV fees, over the past fifteen years. Doubling
the per gallon tax rate would merely return the transportation tax burden on
ordinary Oregonians to the level of 2000.

Nor are gas taxes a particularly heavy burden for most of
us. The average driver pays significantly less than $100 in gas taxes and DMV
fees per vehicle per year. Of course, the burden is higher on folks who drive
more than average, especially rural drivers, but those who drive more than average
also cause more road wear and tear than the rest of us. Moreover, urban drivers
already provide big subsidies to country-road users. It is estimated that gas
and weight-use-per-mile taxes resulting from operations on rural highways cover
less than a third of their construction cost and upkeep.

I am a fan of user fees. As an economist, I like their
incentives and I like the information that they can generate. Consequently, I
would argue that increasing per-gallon gas tax rates (and indexing them to
inflation) is the first thing that needs doing. We ought to do the same thing
with DMV
fees, so that they are no longer a burden on the highway trust fund, but instead
contribute to it, as they were meant to. There is a simple way to offset the
regressivity of gas-tax increases: drop the marginal tax rate for the 5 percent
bracket of Oregon’s personal income tax (the first $3,500 of adjusted gross
income) to zero. That would meet our transportation needs and, at the same
time, increase the overall progressivity of Oregon’s state and local tax
system. Nisbett called for a Red/Blue coalition for meeting the state’s
transportation needs; this seems to be a better candidate for such a coalition
than boosting our highest marginal personal tax rate, which is already the
highest in the U.S.

I would also note that it is now possible to design and
implement cost-effective mechanisms that more precisely monitor road use than
ever before. In the long run, that could be of immense value for transportation
planning and influencing road use. Those devices should probably be tried out
on commercial vehicles, which are already subject to a weight-use-per-mile tax
(in part because the highway damage caused by multi-axle freight vehicles is
not directly covariant with fuel consumption). If the system works, it could be
adapted to personal vehicles as well. Indeed, the Oregon Department of
Transportation is now testing alternatives to the gas tax that would similarly
track participating personal vehicles.

However, treating ODOT’s experiments as a solution to the
transportation-funding problem seems very much like putting the cart before the
horse. Increasing taxes is politically difficult, changing tax mechanisms is
nearly as hard; doing both at the same time is practically impossible. Our
roads need more money now.

4 comments:

It is true that existing revenue streams are not keeping up with the escalation of costs. But I wonder how much of the funding crisis is attributable to the maintenance and replacement liabilities of an overbuilt system. I know that it's hard to sit in traffic and believe that the road system is overbuilt, but we are now wiser about the fact that supply induces demand. Current levels of congestion represent an equilibrium that, in the long term, will be remarkably persistent whether we add lane-miles or rip them up.

"Finally, user fees exact an especially unfair toll on rural Oregonians, who tend to use the roads much more than the rest of us." What? Wouldn't it be *fair* to charge those who USE the roads more?If we use income tax there will be cases where we tax people who rarely use the roads at all. Is that fair?

Everyone has a responsibility to fund the transportation network. Whether you ride a single speed in the Pearl or drive a diesel pick up in Wallowa, you consume goods that move on the entire transportation network. What isn't fair is the current system of fees that create large pockets of economic free riding. That allows disconnects and allows users to devoid themselves of their responsibility of keeping the system intact. Fred is absolutely correct jn pointing out that deferred maintenance a terribly expensive public policy. The deferred 2 inch inlay becomes the 6 in deep inlay or complete reconstruct in a few short years.

Subscribe To The OEB

@OregonEconomics Twitter Feed

Translate This Blog!

Beeronomics

Check out my dedicated beer blog which is a compilation of all of my Beeronomics posts that also appear here as well as lots of other beery stuff. Click here to visit the Beeronomics blog, or browse the latest posts below.

About Me

Mission Statement

This blog seeks to comment on economic issues that matter to the state of Oregon. These issues may be local, state or national but in some way matter to Oregon and Oregonians. The goal of this blog is to eschew politics as much as possible and give an economist's perspective on economics and public policy as it relates to Oregon.

Disclaimer

The opinions expressed on this site are my own and do not represent the opinions of Oregon State University or the OSU Department of Economics.